News analysis: University could face budget deficit

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The cuts to next year’s operating budget may not be enough to offset the entirety of Yale’s budget shortfall, in which case the University will have to scrounge up funds to cover the rest.

When the endowment took a nosedive in 2008, it tore a $100 million gap in Yale’s budget. But the recently announced cuts to department budgets across the University — including 7.5 percent reductions in both personnel and non-personnel spending and delays on campus construction — only amount to about $70 or $80 million in savings, David Soper, the director of Yale’s budget office, said last week.

That means about $20 million to $30 million is still unaccounted for, based on the University’s projections. And in interviews, six top administrators said they do not know exactly where that money will come from or what will happen to it.

Despite the uncertainty, University President Richard Levin said he does not expect a deficit next year. The University was projecting a surplus before the economy turned sour, so the loss of $100 million off the old projection does not necessarily mean Yale has to cut a full $100 million, he said.

The details are hard to pin down because the budgeting process is still in its early stages. The final tabulations will begin taking shape over the next month as departments start submitting their budget proposals. Only then, Soper said, will the administration know in more exact terms where it stands on resolving the deficit.

But if the $70 or $80 million in cuts is not enough to cover the entire gap, drawing more money from the endowment is not an option. In January 2008, when the Yale Corporation increased the target rate of spending from the endowment — in part to provide the funds needed for Yale’s revamped financial aid program — it also added a 6 percent ceiling.

Anticipating the impact of the endowment’s 25 percent drop, the administration took action in December to smooth over the shortfall by redistributing the endowment payout in order to hold it constant over 2010 and 2011 at $1.105 billion, down from $1.164 billion in 2009, Soper said. Administrators decided to withhold about $118 million from the endowment’s contribution to the 2010 budget in order to save it for 2011, reducing what would otherwise be an even larger budget gap when the full effect of the endowment’s 25 percent drop kicks in.

By keeping the endowment payout steady in 2010 and 2011, the administration’s current model holds this year’s budget gap to $100 million. But their plan also includes not trying to recapture all $100 million all at once, to pad the shock of the cuts to the University’s operations, Provost Peter Salovey said. So by design, the cuts to the 2010 budget result in up to $30 million left over.

Administrators offered several possibilities for what could happen with that $30 million.

The simplest is that the $70 or $80 million will turn out to be enough to balance the budget, since the University was previously on track for a surplus in that ballpark, Levin said.

The most optimistic is that the endowment will grow faster than predicted by the current model, which assumes a 25 percent drop in 2009, flat growth in 2010 and then normal growth of about 10 percent after that, Salovey said. If the endowment performs better, Yale could grow its way out of having to make further cuts, which is what happened in 2005.

But the current economic crisis is much deeper than in 2005. It is more likely that the $30 million will have to be earned back with more cuts later on, Salovey said. The administration is already planning an additional 5 percent cut in non-personnel costs in 2011, Soper said.

In the meantime, the $30 million or so still has to come from somewhere.

A deficit could be covered through borrowing, but Salovey said the University wants to avoid that, even in small amounts. Yale does not want to jeopardize its top credit rating, which could happen if the ratio of its debt to the size of the endowment rises. As a matter of principle, Salovey said, long-term debt should not be used to finance short-term needs.

More likely, the $30 million or so will be covered by reserves. When departments do not spend all the money that is allocated to them — as happened often in recent years — the money gets stored in a bank account. Those savings can come into play now, Salovey said.

There may be more or less than $30 million in reserves, Salovey said. Because the accounts are decentralized, there is currently no official total of how much money in available. There is a complicated array of reserve funds, ranging from flexible savings held centrally to reserves held in particular schools or departments that are restricted to specific purposes, Deputy Provost Charles Long said.

Similarly, the overall budget shortfall is hard to conceive because it is spread across Yale’s different schools, each of which relies to varying degrees on endowment income, tuition and the central funding distributed by the Provost’s Office.

The University is projecting $2.7 billion in revenue — from sourcing including tuition, endowment income, medical services, grants and contracts, and gifts — for the 2009-’10 fiscal year, Soper said.

Comments

Anonymous

So Yale only expects the endowment to decline by 25% in FY 2009?

kijw76

Article says:
"There may be more or less than $30 million in reserves, Salovey said. Because the accounts are decentralized, there is currently no official total of how much money in available. There is a complicated array of reserve funds, ranging from flexible savings held centrally to reserves held in particular schools or departments that are restricted to specific purposes, Deputy Provost Charles Long said."